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July 10, 2013

SEC Lifts Ban on Hedge Fund Advertising

Only ‘accredited investors’ would be permitted to actually invest in these offerings

The Securities and Exchange Commission on Wednesday lifted the ban on advertising by hedge funds and private equity firms. The rule, approved by a 4-1 vote, was a congressionally mandated rule required by the Jumpstart Our Business Startups (JOBS) Act.

SEC Chairwoman Mary Jo White said in her Wednesday remarks that under the rule, “only ‘accredited investors’ would be permitted to actually invest in these offerings.” Accredited investors are defined as those who have a net worth of at least $1 million, excluding the value of their home, or earn at least $200,000 annually.

SEC Commissioner Luis Aguilar cast the dissenting vote on the measure, arguing that the commission was moving ahead “recklessly.”

The JOBS Act passed by Congress in April 2012 required a “significant change in this marketplace in an effort to facilitate both capital formation and the accompanying creation of new jobs,” White said. “Specifically, Congress mandated that the commission eliminate the ban on general solicitation in Rule 506 securities offerings. Once the ban is lifted, issuers will be able to use a number of previously unavailable solicitation and advertising methods when seeking potential investors.”

White noted, however, the numerous concerns that have been raised stating that lifting the ban would “result in more fraudulent conduct.”

Both the North American Securities Administrators Association and the Investment Company Institute were quick to express their disappointment with the Wednesday vote.

A. Heath Abshure (right), NASAA president and Arkansas securities commissioner, said that the SEC approved lifting the hedge fund and private equity advertising ban "before approving safeguards," which "needlessly puts investors in harms way." The decision to lift the ban, he said, "without simultaneous adoption of appropriate limits, guidance and investor protections for the most common product leading to enforcement actions by state securities regulators underscores the prospect that investors and issuers alike will be exposed to an indeterminate gap in protection."

Therefore, he said, NASAA "strongly urges the SEC to move as expeditiously as possible to adopt the proposed amendments to Regulation D and Form D."

ICI President and CEO Paul Schott Stevens said that the SEC's final rule fails to include investor protection measures recommended by ICI, consumer groups and many others. "Instead, the SEC put forward a proposal to consider whether investor protections should be added at a later date," he said.

But White said that while protestors have urged the commission to defer lifting the general solicitation ban “while we pursue and adopt related discretionary rulemaking designed to provide more investor protections in this new market,” White argued that “given the explicit language of the JOBS Act as well as the statutory deadline that passed last July, the commission should act without any further delay.”

She added that the SEC should, however, “take steps to pursue additional investor safeguards if and where such measures become necessary once the ban on general solicitation is lifted.”

To that end, the commission also adopted by a 3-2 vote a plan that will allow that agency to collect additional data on how the new rule affects the private offering market and the offering practices that develop under the new rule. The proposal, the SEC said, “would address certain concerns raised by investors in connection with this new rule.”

Said White: “I believe the commission should closely monitor and collect data on this new market to see how it in fact operates, observe the practices issuers and market participants are using, and assess whether and to what extent the changes in the private offering market has led to additional fraud.”

The SEC also approved a rule mandated by Section 926 of the Dodd-Frank Act, which would bar “felons and other bad actors” from participating in a private-placement offering.

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